The following is the second part of a two-part post addressing lawsuits relating to allegedly erroneous information returns Bank of America issued. An earlier version of the posts appeared on the Forbes PT site on January 6, 2015.

Raley v Bank of America involves a disabled 83-year old veteran who was fed up with the bank’s contacting him back in 2010 over credit card accounts he claimed were not his; his anger boiled over to a lawsuit when last January the bank issued a 1099C showing about $7500 in cancellation of debt income. The Raley opinion from the federal district court in the Northern District of Alabama late last year caught my attention both for its procedural implications as well as its use of state law remedies to address a bank’s potentially improper issuance of an information return.

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The case has a somewhat complex procedural pedigree, having been originally filed in state court, then removed to federal court, and then in the opinion from last month remanded back to state court to consider state causes of action after the federal law causes of action were dismissed or dropped.

Here are the simplified facts. In January of 2014, disabled 83-year old veteran Freddie Raley received a 1099C from Bank of America listing about $7500 of credit card debt forgiveness. According to Raley, the debt related to accounts he never opened, and starting in 2010 he had contacted Bank of America to let it know that the accounts were not his. Moreover, he told the bank that it should direct any future communications on the matter to his attorney. Despite the letter, the bank continued to contact Raley about the debt, and it eventually issued the 1099C to both Raley and the IRS.

The improper issuance of the 1099C led to a lawsuit in state court alleging a federal Fair Debt Collection Practices Act (FDCPA) claim and state law causes of action. Due to the presence of the FDCPA cause of action (a federal law issue), the bank moved to transfer the case to federal court. Raley then filed a complaint in federal court essentially repeating the causes of action it brought in state court. Raley then amended his complaint, dropped the FDCPA claim and added a cause of action relating to a violation of IRC Section 7434. As I discussed yesterday IRC Section 7434 involves a fraudulent issuance of certain information returns. The case was teed up on the bank’s motion to dismiss the complaint and a motion to dismiss the case on the pleadings.

I understand Peter’s praise of Raley. Anyone who has been in the bowels of trying to unwind an identity theft knows how frustrating that process is (it has happened to me). The last thing you want on top of the hassle of unwinding the theft is a potential tax bill wrongfully triggered by a bank. Identity theft is major problem worldwide, with credit card fraud itself a major problem within that broader category. A February 2014 article in the Economist noted that fraud related to credit cards cost retailers over $11 billion worldwide in 2012, with the US suffering a whopping 47% of the total 2012 losses.

Fraud against seniors is itself a special category with its own characteristics and often differing perpetrators preying on those who may be most vulnerable (here is a useful link to resources for those who might be looking for help to prevent and address elder fraud issues).

What does this have to do with tax procedure and tax administration? One consequence of improper credit card usage is a possible unexpected tax bill for the person suffering from the improper or unauthorized usage of a credit card. To be sure, there should not be an income tax consequence from someone using your card improperly. That is so because if you notify a credit card issuer that there is an unauthorized use of your credit card, or someone has without authorization established a card in your name, you have no or very little liability to make payments relating to the unauthorized use (see more from the Consumer Financial Protection Bureau). That should be the end of the story when it comes to the IRS. Unlike when a credit card company cancels a debt say because a cardholder is unable to make payments due to an inability to pay, no tax consequences relating to the relief from the fraudulent charges should flow from that in part because there is no enforceable obligation that could give rise to cancellation of indebtedness income.

When there is a discharge of a legitimate credit card debt, card issuers will a 1099C. Unfortunately, sometimes banks make mistakes and issue 1099C’s relating to the supposed cancellation of debt even from an unauthorized card usage. When they do so, it can generate bad feelings and almost certain correspondence from the IRS to the taxpayer who got the 1099C relating to the income underreporting if the taxpayer (properly) does not report the cancelled credit card debt on his return. This can lead to needless correspondence with the IRS and the possible filing of a petition in Tax Court to protect against an erroneous deficiency assessment.

The Legal Issues

Unlike the Smith case discussed yesterday, Raley sought damages under Section 7434 for the fraudulent issuance of an information return (he had previously abandoned his FDCPA claim). Unfortunately for Raley, however, Section 7434 does not include Form 1099C as one of the information returns that impose liability for fraudulent issuance. As I mentioned above, perhaps Congress needs to revisit the statute to bring 1009C’s into the statute’s coverage, and perhaps address whether fraudulent conduct is a necessary trigger for liability.

Similar to the Smith case, Raley also brought state law causes of action, including negligence, wantonness, defamation. In Raley, the federal court remanded the case to Alabama state court to consider some of the state claims. In so doing, it took the opportunity to discuss the merits of the state law causes of action based on facts most favorable to Raley (it did so because in federal motions to dismiss courts essentially accept the plaintiffs allegations as true but also consider whether even looking at those facts in the most favorable light whether the claim states a plausible basis for relief).

If I were the bank (or other financial institutions that may have issued improper 1099Cs) I would be worried about the federal judge’s discussion of the state law causes of action, especially its discussion of the wantonness claim.

Wantonness, according to the court, is “defined as “[c]onduct which is carried on with a reckless or conscious disregard of the rights or safety of others.” Ala. Code § 6-11-20 (1975). A wantonness cause of action imposes similar requirements to a negligence claim, but with the enhanced culpability requirement that the conduct be done recklessly or in conscious disregard of others’ rights.”

Here is language from the opinion that raised my (and I suspect some bankers’) eyebrows:

Raley alleges that the Bank repeatedly contacted him and threatened collection actions against him even though he claimed to have never opened the accounts and instructed that all contact be made through his attorney. The Bank then, apparently without ever referring the matter to its Fraud Department, submitted a Form 1099-C, stating that it had forgiven the debt. While these are unproven allegations, they are sufficient at this stage to plausibly allege that the Bank acted with a reckless or conscious disregard of Raley’s rights, especially considering the repeated denials of liability and lack of a sufficient investigation into the validity of the debt.

I am intrigued by the wantonness claim and its standard for liability. Perhaps Congress should take note of that standard and modify Section 7434 to allow private parties to bring claims with respect to broader class of returns and at a lesser standard of liability than under current law?

In any event, we will watch this case as it makes its way back to state court though I would not be surprised to see BOA settle this matter to avoid a possible adverse state law precedent on its 1009C issuance practice.

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Comments

Glad you guys picked this up and thanks for the kind mention. This is an example of a case I find very interesting, but extremely on the lawyerly side. I’m hesitant to write about those, but when nobody else does I go by the motto that anything worth doing is worth doing poorly.

This article is very interesting. I hope BofA doesn’t settle and we get some authority. I’m glad you are following it and will keep us updated.

I have so many questions as I contemplate how to bring suit against the big banks for issuing improper 1099-Cs (whether for disputed charges, ancient accounts, or wholesale identity theft accounts). I am seeing SO MANY clients who are having to fight improper Forms 1099-C. Banks issue whatever the hell they want, and the burden falls on taxpayers to take on the IRS, who assumes blindly the information is correct. It is infuriating and has to be stopped.

How can we get IRS to make use of the info return filing penalty provisions? How can we enforce them ourselves? I guess we have to look to tort law. But does the existence of 7434 preempt state law causes of action for information returns that fall within its purview? What about Forms 1099-C, since they don’t fall within 7434? And the matter is too big to take on piecemeal. I recently learned of a CA statute that makes it possible for a person to enforce in a state court class action as a private AG a federal statute that does not provide for a private cause of action (my mind goes immediately to he millions of Forms 1099-C the Big Banks issue with complete disregard to the truth of the transaction — IRS has not and will not assess penalties for the filings, even though I prevail against just about every 1099-C I come across in administrative or court practice). This provision sounds very exciting, if it’s true, but I don’t practice in CA!

Just yesterday I reviewed a case where DFS (Discover) issued a 2013 Form 1099-C for a debt that has been utterly inactive since 2005. Under GAAP, DFS would have charged it off 180 days after default and taken a bad debt business deduction. What could be the incentive to issue a Form 1099-C 8-9 years later? Are they manufacturing additional tax write-offs somehow with the transfers to and fro btw. trusts/servicers, before issuing the 1099-C? What is the incentive??

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